What Is a Tax Refund Loan — and Should You Get One?
If you know you have a tax refund coming but need access to cash now, you might consider a tax refund loan. A tax refund loan often comes with 0% APR, but it’s typically only available at certain times of year, and you might need to pay tax preparation fees.
Here’s what you need to know about a tax refund loan, and how to compare it with other types of loans:
- Tax refund loans: the basics
- Where to get a tax refund loan
- Pros of a tax refund loan
- Cons of a tax refund loan
- Deciding if you should get a tax refund loan
- Alternative options to tax refund loans
Tax refund loans: the basics
Some financial institutions will offer you a short term loan based on your upcoming tax refund. This is often referred to as a Refund Advance Loan or a Refund Anticipation Loan (RAL).
You could also get a Refund Anticipation Check (RAC), which usually occurs when you indicate to your tax preparer that you’ll pay their fees out of your refund. The government then sends your refund as a check to your financial institution, which disburses the funds appropriately.
If you decide to get a tax refund loan, your tax preparer or loan agent will review your return, your income and your credit when you e-file your taxes. Based on all of this information they could loan you a portion of the money you’re anticipating to receive back from the government.
Your RAL will then be loaded onto a card or deposited into a bank account. A temporary bank account is set up for your tax refund so that when it arrives, the amount of the RAL and any interest or fees are deducted automatically. You’ll keep whatever is leftover.
Traditional RALs were known for having high interest rates, but today some tax preparers offer them at 0% APR as a way to entice customers.
Where to get a tax refund loan
Various tax preparation services offer tax refund loans. Here are a few major companies that offer this type of loan:
If you apply in January or February, you could get a tax refund loan from H&R Block for up to $3,500. These loans, which are funded by MetaBank, are available in the amount of $250, $500, $750, $1,250 or $3,500, depending on how much of a refund you’ll be receiving on your taxes.
This is a 0% APR loan, and you might be able to access your funds the same day you file via H&R Block’s Emerald Prepaid Mastercard.
Intuit TurboTax offers tax refund advances in the amounts of $250, $500, $750, $1,000, $1,500, $2,000, $2,500, $3,000, $3,500 and $4,000, based on your predicted refund. If you’re approved, you’ll get the loan immediately on a Turbo Visa Debit Card.
Similar to H&R Block’s tax refund loan, TurboTax’s refund advance is only available during certain months.
Jackson Hewitt offers both early refund loans starting in December and no-fee refund loans starting in January. Its early refund loans max out at $1,000 and have a relatively high APR of 35.9%. If you can wait until January, you could access one of its regular tax refund loans, which come with 0% APR and max out at $3,500.
Pros of a tax refund loan
Here are some benefits of a tax refund loan:
- Get access to your funds quickly. If you need money now, a tax refund loan could help you pay for immediate expenses.
- Stay on top of your finances. If you’re accruing interest because of unpaid bills, paying them off with a tax refund loan could save you money.
- Could cost nothing to access your funds now. If your tax preparer is offering an advance on your return free of charge then it could equate to an easy way to get instant cash.
Cons of a tax refund loan
On the other hand, there might also be some disadvantages to borrowing this type of loan:
- The prepaid debit card could have fees. If your tax preparer loads the money onto a card, there might be fees associated with using the card that you should be aware of.
- Could cost money in interest or fees. Make sure you learn exactly what this loan will cost you and if the lender is charging interest on the advance.
- You could end up with less money than anticipated. If your tax preparer has miscalculated, or if the IRS holds any of your return due to a tax lien, you could receive less money than you expected but you’d still be responsible for repaying the full amount of the loan.
Deciding if you should get a tax refund loan
There are some cases when a tax refund loan might be your best option:
- If you need money in an emergency. If you have no other way of getting money and need it immediately, a tax refund loan could be a way to avoid other forms of bad debt.
- If it won’t cost you anything. If there are no fees or interest involved in getting the loan, then it might make sense to access your funds now.
- If it would cost you more to wait for the money. If you’re paying high interest rates on debt now and need your tax return to get out of debt, using a loan to clear the debt quickly could save you cash.
In other cases, it could be best to wait for your actual tax return to arrive:
- If you’d otherwise prepare your own taxes. It does cost money to have a tax preparer do your taxes, which you’ll need to do in order for them to loan you money on your return. If you don’t need the cash now and this is the only reason you’re paying a preparer, it might make more sense to do your taxes yourself and wait for your return.
- If you can afford to wait for the cash. If you don’t need the cash in a hurry it could be easiest to wait for your return.
- If you have a federal tax lien or owe child support. If you expect there’s a reason the IRS might withhold some of your return, then you should probably wait instead of taking out a loan based on a return that might not fully materialize.
- If you need more cash than your expected return. If you’re looking for a larger loan a tax refund loan is probably not the right option for you and you might want to consider a personal loan instead.
Alternative options to tax refund loans
If you’re looking for ways to get money now, you don’t need to rely solely on an advance on your tax refund. Here are some other options:
- Payday alternative loan (PAL): Credit unions are legally allowed to give federally regulated PALs that could help you get access to small dollar amounts quickly. If you don’t need a lot of money and you’re looking for a short term loan, a credit union could have a lower interest rate. Keep in mind that a PAL is not a payday loan, though it does have a shorter repayment than a traditional personal loan. Payday loans come with exceptionally high interest rates that can make repayment difficult.
- Personal loan: If you need more money than what’s on your expected tax return, it could make sense to borrow funds using a personal loan. Compare products online to make sure you’re getting your best APR and terms.
- Low-interest credit card: Depending on your credit, you could qualify for a credit card with an introductory rate as low as 0% APR. If you pay off your balance on a no-interest credit card before the promotional period expires, you won’t owe anything in interest.
There are situations where a tax refund loan could help you access the money you need immediately, with few negative consequences. But if you’re going to get one, make sure you’re aware of all the fees or interest you’d pay — and consider other options that might suit you better.